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From the CQ Newsroom: Acting CBO Director Calls $260 Billion Deficit 'Sustainable'

By Steven T. Dennis, CQ Staff

August 17, 2006 -- The acting director of the Congressional Budget Office said Thursday that the federal budget deficit for fiscal 2006 had shrunk to a "sustainable" level of $260 billion, the lowest in four years.

Donald B. Marron, who became acting CBO director after Douglas J. Holtz-Eakin departed at the end of 2005, issued a sanguine view of the economy and the deficit picture. He described the deficit as below the historical average as a percentage of gross domestic product (GDP) and projected a reduction in inflation coupled with continued economic growth.

"It's a level that's sustainable," Marron told reporters, referring to the deficit, which has dropped to about 2 percent of GDP. Marron said deficits at that level would not cause the national debt to grow faster than the economy as a whole.

The CBO's mid-year fiscal update predicts the deficit will increase in 2007 to $286 billion, drop to $273 billion in 2008, and then climb to $328 billion in 2010. But it would shrink sharply in 2012—to about $54 billion—if tax cuts enacted this decade are allowed to expire on schedule. Marron issued no judgments on whether that was a wise course of action.

Instead, Marron said the government could continue to run deficits in the range of 2 percent of GDP indefinitely, although he acknowledged long-term challenges from the looming retirement of the Baby Boom generation. The bulk of those effects, however, come outside the CBO's 10-year budget window.

The CBO, which had first announced its new, lower deficit projection two weeks ago, cited a wave of higher-than-expected revenue from income, payroll, and corporate taxes. Marron said it was too early to know exactly why that revenue spurted, but he surmised that the still strong housing market and capital gains realizations played a role. The CBO does not expect this year's spurt in revenue to replicate itself, as it expects corporate profits to level off.

President Bush had set a goal of slicing the deficit in half by fiscal 2009 from the administration's projection of $521 billion, or 4.5 percent of gross domestic product, for fiscal 2004.

If the new CBO projections prove accurate, that goal would be met two years early, despite the massive costs of the war in Iraq, a new Medicare prescription drug benefit, continued tax cuts, and unprecedented hurricane relief spending.

Republicans credited themselves for the improving picture. "Thanks to pro-growth policies and a responsible budget blueprint, we're achieving substantial deficit reduction—even with the extraordinary circumstances of the past year, including Hurricane Katrina and the ongoing war on terror," said House Budget Committee Chairman Jim Nussle, R-Iowa.

But ranking House Budget Democrat John M. Spratt Jr. of South Carolina said the new figures are not cause for celebration.

"The administration's supporters may wish to paint this deficit as progress, but a deficit of $260 billion falls far short of the $236 billion surplus booked in 2000 and the $305 billion surplus predicted for this year when the Bush administration took office," Spratt said.

The rosier near-term deficit picture painted by CBO follows last month's projection by the White House Office of Management and Budget, which cut its fiscal 2006 deficit estimate to $296 billion from $423 billion in February.

The CBO attributed the bulk of the difference between its projection and that of its White House counterpart to CBO's assumptions that the government would spend less on defense, Medicare, and Medicaid than the administration assumes.

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